Saudi arms deal inquiry closes in on secret papers

The Serious Fraud Office is on the brink of obtaining information from Swiss banks which may implicate the Saudi royal family in secret arms-deal commissions of more than £100m, sources close to the attorney general's office confirmed yesterday.

The SFO has been inquiring for three years, in some secrecy, into allegations of systematic corruption in international deals arranged by Britain's biggest arms company, BAE Systems.

But it was only this autumn that the Saudis, along with BAE executives and officials of the MoD's arms sales department, DESO, became aware of how much progress the SFO has made. Sources close to the Swiss say the authorities there notified two middlemen that access to their bank accounts was being sought .

One is believed to be a prominent Lebanese politician, the other a wealthy Syrian. A process of formal appeal by them has been taking place in Geneva. Legal sources said that the Swiss normally grant preliminary access in such criminal cases for accounts to be inspected. This would enable the SFO to trace any payments passed on to accounts belonging to the Saudi royals.

Since the Swiss disclosure to their account-holders, the attorney general in London has faced renewed political pressure from BAE to block the expanding SFO investigation.

The company has hired a City firm, Allen & Overy, to protect its position with the SFO. BAE denies wrongdoing and says it is co-operating with the inquiry. The attorney general Lord Goldsmith is reported to have refused to intervene, and MPs say any move by him to do so would provoke uproar at Westminster. The Saudis also deny any wrongdoing.

Saudi officials are reported to have met Tony Blair's chief of staff, Jonathan Powell, to discuss the fate of "Al Yamamah 3", the latest multi-billion pound installment of BAE's warplane sales to the Saudis, amid fears for the deal if the Swiss probe is not blocked.

The Powell family have intimate knowledge of the history of the deals. Mr Powell's brother, Charles - Lord Powell - has been on BAE's payroll as a consultant, and his son, Hugh, heads the Foreign Office's security policy department, which is concerned with BAE. But there is no reason to believe any threats would be met with other than an entirely proper response in Downing Street.

Reported threats from the Saudis to break diplomatic links and withdraw intelligence co-operation over al-Qaida have been discounted at Westminster.

According to internal Cabinet Office documents seen by the Guardian, the Saudi royal family relies on a flow of MI6 intelligence from Britain on the neighbouring Shia Muslim regime in Iran. The royals, who are Sunnis, are also a target of al-Qaida, being accused of despotism and corruption. It would weaken their own position to break off intelligence links with Britain.

The investigation, now one of the SFO's largest and most complex, began when the Guardian obtained and published allegations three years ago that BAE was running a Saudi "slush fund", and that it separately used an offshore conduit, Red Diamond, to make worldwide secret payments.

Banking sources say the fact that the SFO has approached Swiss banks with information about identified accounts, suggests they have successfully used their wide British powers to order disclosure by UK banks, and by BAE itself.

In the past year, the SFO inquiry has dramatically expanded, identifying alleged BAE agents in Chile, Romania, the Czech Republic, South Africa, and, most recently, in Tanzania. In the latter case, in 2001 Tony Blair pushed through cabinet a BAE £28m radar sale to one of Africa's poorest countries against the heated opposition of then international development minister Clare Short. Both the prime minister and BAE reassured critics at the time that the sale was above board.

Last month, the Guardian disclosed that accidentally-released Whitehall documents revealed how the price of BAE's Tornado warplanes in Saudi Arabia's original Al Yamamah contract had been inflated by 32%. Another document in the archives quoted a dispatch from a British ambassador saying the family of Crown Prince Sultan "had a corrupt interest in all contracts".